Manufacturers have over-produced light emitting diodes (LEDs) and will face mounting inventories amid weak demand into next year, a new report claims.

Research firm LEDinside says that the industry will make about 100 billion LED chips in 2011 for a market that needs only 89 billion.

That 12% “oversupply ratio” will worsen to 21% in 2012 after LED makers add manufacturing capacity, according to LEDinside, a division of Taiwanese market intelligence firm TrendForce Corp.

“Although 2H11 is traditionally the peak season for the LED industry, doubt about oversupply spreads on weak market demand,” the report predicts.

LEDs hold great promise for energy efficiency and CO2 reduction because they require only about 10-to-20% of the electricity that powers incandescent light bulbs.

But the report notes that LED bulbs are failing to catch on in most countries other than Japan. While LEDinside doesn’t specifically blame high prices, critics often note that consumers balk at paying $40 for an LED bulb, even if the bulb does last a purported 25 years and drastically reduce energy costs.

LEDinside also blames the glut on slow demand for LED-backlit TVs. It notes that TV makers like Samsung and LG have lowered their forecasts for LED TV penetration rate to 50%, from 70% earlier this year. The industry will ship 203 million LED TVs in 2011, down from earlier estimates of 220 million, the report states.

A Chinese government crackdown on copycat mobile phones also contributed to the oversupply. Cellphone displays rely on LED chips.

On the positive side, “The number and scale of projects for outdoor lighting and architectural lighting in Europe and the US continued to increase, especially LED street lighting projects in Eastern United States,” the report states. “In addition, LED lighting for buildings also generally increased, including from decorative lighting for exterior building to indoor lighting.” Other growth areas include “lighting for plant growing, agricultural lighting (UV curing technology), and lighting for freezers.”

LEDinside also points out that S. Korean manufacturers including Samsung and LG have ramped up their own production of LED lighting products and could soon win a place among the world’s top 5 LED vendors